Exchange Rate Pass-Through on Prices in Nigeria—A Threshold Analysis
Persistent exchange rate depreciation and its debilitating effects on rising inflation have remained a concern in Nigeria. This article explores the effects of exchange rate pass-through on producer prices, consumer prices, export prices, import prices and the Taylor rule from 2000 to 2023, using qu...
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2024-10-01
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| author | Olajide O. Oyadeyi Oluwadamilola A. Oyadeyi Faith A. Iyoha |
| author_facet | Olajide O. Oyadeyi Oluwadamilola A. Oyadeyi Faith A. Iyoha |
| author_sort | Olajide O. Oyadeyi |
| collection | DOAJ |
| description | Persistent exchange rate depreciation and its debilitating effects on rising inflation have remained a concern in Nigeria. This article explores the effects of exchange rate pass-through on producer prices, consumer prices, export prices, import prices and the Taylor rule from 2000 to 2023, using quarterly data and adopting threshold autoregression and self-exciting smooth threshold regression methods. The findings suggest that there are non-linearities in the way that exchange rate depreciation affects prices in Nigeria. Furthermore, the findings suggest a threshold of 5 percent depreciation. Two sub-sample analyses corroborate the main findings, showing that a threshold of 5 percent is the optimum benchmark if demand and supply are not to be weakened. At this level or below, the effects of exchange rate depreciation on inflation are much lower, even though prices will rise. However, above this benchmark, the effects of depreciation on inflation are much larger, weakening consumer demand for both imported and domestic goods as well as producer supply of both exported and domestic goods and services in the economy. This result implies that an average exchange rate depreciation not higher than 5 percent within a quarter is reasonable if the Nigerian economy is to remain competitive both domestically and globally. Finally, the results suggest that the exchange rate pass-through to prices is considerably higher in Nigeria below the threshold, while it overshoots for producer prices, export prices, and import prices above the threshold. To keep inflation in check, this paper suggests that the monetary authorities should try to keep exchange rate depreciation below the established thresholds, while also considering adjusting the policy rate to take into account the exchange rate depreciation thresholds in order to keep domestic prices stable. |
| format | Article |
| id | doaj-art-69bd7b72996a43af8afff9b203d5d8bd |
| institution | DOAJ |
| issn | 2227-7072 |
| language | English |
| publishDate | 2024-10-01 |
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| series | International Journal of Financial Studies |
| spelling | doaj-art-69bd7b72996a43af8afff9b203d5d8bd2025-08-20T02:55:57ZengMDPI AGInternational Journal of Financial Studies2227-70722024-10-0112410110.3390/ijfs12040101Exchange Rate Pass-Through on Prices in Nigeria—A Threshold AnalysisOlajide O. Oyadeyi0Oluwadamilola A. Oyadeyi1Faith A. Iyoha2Imperial College Business School, Imperial College, London SW7 2AZ, UKDepartment of Sociology, Faculty of the Social Science, University of Ibadan, Ibadan 200005, NigeriaDepartment of Economics, School of Management and Social Sciences, Pan-Atlantic University, Ibeju-Lekki, Lagos P.O. Box 73688, NigeriaPersistent exchange rate depreciation and its debilitating effects on rising inflation have remained a concern in Nigeria. This article explores the effects of exchange rate pass-through on producer prices, consumer prices, export prices, import prices and the Taylor rule from 2000 to 2023, using quarterly data and adopting threshold autoregression and self-exciting smooth threshold regression methods. The findings suggest that there are non-linearities in the way that exchange rate depreciation affects prices in Nigeria. Furthermore, the findings suggest a threshold of 5 percent depreciation. Two sub-sample analyses corroborate the main findings, showing that a threshold of 5 percent is the optimum benchmark if demand and supply are not to be weakened. At this level or below, the effects of exchange rate depreciation on inflation are much lower, even though prices will rise. However, above this benchmark, the effects of depreciation on inflation are much larger, weakening consumer demand for both imported and domestic goods as well as producer supply of both exported and domestic goods and services in the economy. This result implies that an average exchange rate depreciation not higher than 5 percent within a quarter is reasonable if the Nigerian economy is to remain competitive both domestically and globally. Finally, the results suggest that the exchange rate pass-through to prices is considerably higher in Nigeria below the threshold, while it overshoots for producer prices, export prices, and import prices above the threshold. To keep inflation in check, this paper suggests that the monetary authorities should try to keep exchange rate depreciation below the established thresholds, while also considering adjusting the policy rate to take into account the exchange rate depreciation thresholds in order to keep domestic prices stable.https://www.mdpi.com/2227-7072/12/4/101exchange rate depreciationconsumer pricesproducer pricesexport pricesimport pricesTaylor rule |
| spellingShingle | Olajide O. Oyadeyi Oluwadamilola A. Oyadeyi Faith A. Iyoha Exchange Rate Pass-Through on Prices in Nigeria—A Threshold Analysis International Journal of Financial Studies exchange rate depreciation consumer prices producer prices export prices import prices Taylor rule |
| title | Exchange Rate Pass-Through on Prices in Nigeria—A Threshold Analysis |
| title_full | Exchange Rate Pass-Through on Prices in Nigeria—A Threshold Analysis |
| title_fullStr | Exchange Rate Pass-Through on Prices in Nigeria—A Threshold Analysis |
| title_full_unstemmed | Exchange Rate Pass-Through on Prices in Nigeria—A Threshold Analysis |
| title_short | Exchange Rate Pass-Through on Prices in Nigeria—A Threshold Analysis |
| title_sort | exchange rate pass through on prices in nigeria a threshold analysis |
| topic | exchange rate depreciation consumer prices producer prices export prices import prices Taylor rule |
| url | https://www.mdpi.com/2227-7072/12/4/101 |
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